The economy will recover

It's likely to be an average, although sharp, recession. It will be moderate because of the massive infusion of liquidity into the economy in the form of lower interest rates and congressional action.

There is no disputing that the Connecticut economy dipped into recession following the Sept. 11 terrorist attacks. Factors such as increasingly weak economic activity all during the fourth quarter of 2000 initiated the decline, while the tragedies in New York, Washington and Pennsylvania cemented our short-term economic fate.

It's likely to be an average, although sharp, recession. It will be moderate because of the massive infusion of liquidity into the economy in the form of lower interest rates and congressional action. It will be sharp because we will see a burst of job losses in the service sector, added to continuing attrition in manufacturing. Job losses are likely to spike unemployment rates to at least five percent locally (though below the six percent plus rate nationally), even as we exit the recession.

The spike in unemployment is likely to trigger several other negative outcomes. For example, it may:

* Increase consumer credit delinquencies, bankruptcies and mortgage foreclosures.

* Ravage overexposed companies or those particularly dependent on retail sales.

* Significantly deplete unemployment compensation reserves, leading to additional taxes in this area.

* Hurt sales and use tax collections.

I am cautiously optimistic that the recovery will begin in the second quarter of next year. In fact, if any one of several things go wrong, it could prove such optimism misguided. The risks still exceed the potential positives, and any prudent business planning needs to be attuned to such risks.

Key challenges include a long-term skilled workforce shortage, a worldwide energy situation that's currently quite rosy but is also more vulnerable than people realize, the end of excellent state and local fiscal conditions and, of course, the terrorist wild card. Most of all, the foreign political-economic situation is the riskiest call of all. The war in Afghanistan; conflict in the Middle East; recession in Japan; instability in Indonesia; strife in the Philippines, Colombia, and the Balkans - all of these could endanger either our energy supply or trade opportunities, all can be affected by terrorism even if the mainland United States is spared.

But there is good news. The Federal Reserve responded immediately to the fragile, post-attack economic situation. Congress and the president will try to alleviate the pressures with the new tax stimulus packages. Congress is getting mired in partisanship over some of this, but eventually cooler heads will prevail with a compromise bill. As of November, the Fed had cut the federal funds rate 11 times, for a total 4.75 percent drop. And, the Feds cuts may not be over; we still have the potential for another 25-basis-point move.

The consumer is still a key. Recent retail reports show mixed activity in consumer spending. Great reports from October have recently been offset by bad news in November, largely due to fluctuations in auto sales. Luxury retailers have cause to worry, but the discounters may have a merry holiday season. Record mortgage refinancing and a continuation of interest rate specials on major purchases will aid the consumer. Consumers who have jobs should be able to keep spending.

However, consumer debt has also hurt in some ways. A significant number of Americans are overextended, and this is showing up as increased delinquencies in federal home mortgage programs, credit card delinquencies and more consumer bankruptcies.

Nationally, unemployment is surging. Despite some slowing in new layoffs, we are still seeing new job losses averaging 450,000 a week. This will soon drive federal unemployment past six percent. Regions like New England will likely see a rate half to three-quarters a percentage point lower due to demographic issues. Despite continued reports of layoffs at larger companies, Connecticut may do even better because of slow labor force growth and reports of companies still needing skilled workers on our surveys. Unemployment will be the key drag on consumer confidence, leading to tightened spending and increases in delinquencies and bankruptcies.

Slower growth has also hurt corporate profits. Since profits came in lower than projections, the first area affected was capital spending. This is slowly running its course since in October we saw the worst industrial output report in 11 years. But the truth is that some industries were walloped even before Sept. 11, and have had a miserable year, in particular, dot-coms, auto-related industries, advertising and telecomm equipment companies. Real recession conditions in these areas have contributed to a wider malaise in the economy. Sales have surges in the auto industry but the jury is out on real profits in that industry following Sept. 11. All air-travel-related businesses, including destination tourism, civil air, aerospace manufacturing, and other hospitality industries, will have tough sledding through the winter.

Editor's note: Peter M. Gioia is an economist for the Connecticut Business & Industry Association.